Climate Change Policy After Marrakech: The Quest For Convergence

Forum on the Future of the Greenhouse Gas MarketInternational Emissions Trading Association

December 3, 2001

Greetings and welcome to Washington. It is wonderful to see so much climate leadership in one place. And I am delighted to see the U.S. Administration represented on the program. I must say, however, that I am surprised the White House did not send Vice President Cheney. I know that sounds funny, but the Vice President, as most of you know, has been kept in an undisclosed location in recent weeks for security reasons. And I was thinking on my way over that this would be a great hiding place for him.

After all, who would expect to find Vice President Cheney at a conference on global warming?

Seriously, it is a pleasure to be here, and I want to thank Andrei Marcu and his colleagues at IETA for organizing this very important conference. I also want to pay tribute to the wonderful work that IETA is doing to encourage the development of an active, global greenhouse gas market. Getting the business community to come together to explore and promote solutions to climate change is a goal that the Pew Center shares with IETA. It is the goal that led us to form the Pew Center's Business Environmental Leadership Council. And I am pleased to note that a number of the Council's members-including BP, DuPont, Ontario Power Generation, Shell International, and TransAlta-are also active members of IETA. All of these companies-and, indeed, all of the corporate members of both of our organizations-should be applauded for their commitment to climate solutions.

I'd also like to take a moment to pay a special tribute to someone who throughout the past decade has been at the very center of this struggle. I speak of Michael Zammit Cutajar who, as many of you know, will soon be stepping down as executive secretary of the climate change secretariat. Michael's not the sort to acknowledge just how tough a job that is. But believe me, it is tough. And Michael has handled it all with dignity, with great diplomatic skill, and with tremendous equanimity. His steady hand helped navigate us through some of our rockiest moments. And when it was most necessary, he was always there to remind us of our real objective: a safer and fairer world for all who will follow. Would you join me, please, in thanking Michael for his unstinting dedication to that cause.

This certainly is not the first conference to contemplate the future of the greenhouse gas market. But it may well be the most illustrious, and it says a great deal about how far we have come in the international effort against climate change. With the recent agreements in Bonn and Marrakech; with new proposals in Europe for carbon trading systems; with the steady growth in interest and investment across so many sectors of the economy; we are making real headway. We are beginning to see the outlines of a genuine greenhouse gas market.

At the same time, of course, we face new challenges. Those of us who have been at this issue for some time know that it's just one challenge after another after another. The rest of you are now forewarned. Our latest challenge, I would suggest, is one of convergence. Of course, it was clear from the start that getting everyone to play by the same rules wasn't going to be easy. So convergence isn't exactly a new challenge. But for reasons obvious to us all, it has taken on a whole new dimension. Before, at least, we could assume that everyone was playing the same game. Now we're not sure whether the biggest player is playing at all. There are hopeful signs, and I'll say more about that later. But it's clear that for some time to come, if the United States chooses to play, it will be playing its own game. That may be okay. It may even be beneficial. But sooner or later - if we're going to do what it takes to avert global warming - we will all need to learn to play together, in the same game. We will need convergence.

To those of us eager to see a healthy, thriving greenhouse gas market, the emergence of fragmented or competing regimes is naturally troublesome. It means conflicting rules, higher transaction costs, trade distortions, the need for more lawyers - hardly the sorts of things that make a market flourish. But what I'd like to suggest to you today is that the market is really less the victim than the cure. I mean "market" here not in the narrow sense - the buying and selling of emissions reductions - but rather, in the broadest sense. I mean the extraordinary power of the marketplace to spur innovation, capitalize on opportunity, and mobilize the investment needed to tackle even a challenge as large as climate change. I believe that, once unleashed, the demands of this mighty economic engine will in themselves compel governments to work together. The need for certainty, for consistency, and for a level playing field all will work to encourage a merging of regimes. And, I'm willing to venture, they will work to encourage a leveling up, not a leveling down. Those of us working on climate change have looked to the market mostly as a way to deliver emissions reductions as cost-effectively as possible. What I'm arguing is that the market will serve, also, as a powerful force for convergence - for the kind of convergence that will be needed if we are to mount a truly effective response to climate change.

In the next few minutes, I'd like to review recent developments, both internationally and here in the United States, and what they suggest about the need for convergence, and the prospects for convergence, on the road ahead. And then I'd like to touch on the new challenges dominating the domestic agenda here in the United States in the wake of the September 11 tragedies, and how our efforts against climate change can help meet them as well.

International Climate Policy After Marrakech

First, the international context. As all of you know, climate negotiators reached agreement last month in Morocco on a complex set of decisions spelling out the rules for implementing the Kyoto Protocol. The Marrakech Accords followed very much in the spirit of the Bonn Agreement four months earlier. Together, they represent a true milestone in a difficult international effort begun more than a decade ago. The agreements have been rightly declared a triumph of multilateralism. But I believe they represent a triumph as well for the principle of harnessing the global market to protect our global environment.

It wasn't so long ago that the whole notion of emissions trading, particularly within Europe, got the same kind of reception Disneyland originally received in Paris a few years back. It was seen as a fanciful American export. But the Kyoto architecture - an architecture that, indeed, was largely made in America - is at its core a market-based strategy. And, for the most part, the decisions in Bonn and Marrakech provide the certainty and the flexibility needed to ensure that this architecture works the way it was intended. There will be no arbitrary cap on emissions trading; there is reasonable fungibility among the Kyoto mechanisms; and the establishment of unilateral CDM and project-based JI creates important opportunities for emissions-reducing investment. While not completely unfettered, the Kyoto mechanisms emerged from Marrakech as sound as one might have hoped.

It's true, Kyoto's first target period takes us only a decade into the future, and provides only a small fraction of the total reductions we must ultimately achieve. But the bottom line is that we have to start somewhere, and in Marrakech, much of the world established that starting point. The priority now is to ensure the Protocol's swift ratification and entry into force so we can, at long last, begin to deliver on Kyoto's promise and achieve real progress on the most urgent environmental issue of our time.

Even before the Marrakech accords, we saw important progress on emissions trading at the national and regional levels as well. The UK Emissions Trading Scheme, as all of you know, was launched in August of this year, and government officials there say it could reduce carbon emissions by as much as 2 million tons per year by 2010. Similarly, the European Union intends to introduce an EU-wide trading system by 2005 and is working out the trading rules as we speak.

The emergence of these regimes, while quite promising, poses an early test of our ability to converge. The two regimes differ in key respects. The British system, for instance, is strictly voluntary; the EU proposal is not. The British system covers the full basket of six greenhouse gases included in Kyoto; the EU restricts trading to carbon dioxide alone. It will be interesting, perhaps even amusing, to see how these and other differences are resolved. I saw in the press recently that my friend and colleague, UK Environment Minister Michael Meecher, had declared, with typical British bluster, "We think our scheme is better." He said he was -- quote -- "keen" for the EU to come up with something compatible to the UK system. I haven't yet heard the response from Brussels. And I hope that Michael Meecher remains my friend!Nonetheless, these developments - the completion of the Kyoto rules, and the emergence of trading systems in Europe - are critical steps. They show governments working both individually and collectively to create systems that could eventually form the basis of a coordinated global approach. They are important as well because, as these new systems are put in place, we will begin to learn what works and what does not. They will help us better understand how to make trading a true cornerstone of our climate strategy.

Assessing the Climate for U.S. Action

What, then, of the United States? What are the prospects for a credible domestic strategy that could, in time, merge with the international regime? Better, I would suggest, than many of you might imagine. I have little expectation, to be sure, that the Bush administration is or will be prepared to put forward the kind of proposals needed to launch a serious effort, at least not at the moment. Nor, for that matter, was the previous administration. But just as President Bush's rejection of Kyoto helped rally international support for the Protocol, it seems to have stimulated a very interesting and encouraging bipartisan response on Capitol Hill. Suddenly, both Democrats and Republicans seem eager to demonstrate their commitment to tackling climate change.

Senator John Kerry of Massachusetts, for instance, recently introduced a bipartisan bill to establish mandatory tracking and reporting of greenhouse gas emissions. This would be an important first step toward building a comprehensive emissions reduction strategy. It's also an idea that the White House seems at least open to considering.

Then there is a bill introduced jointly by Senator Robert Byrd, a leading Democrat from coal-producing West Virginia, and Senator Ted Stevens, a leading Republican from oil-producing Alaska. Their bill would devote billions to researching and developing climate-friendly technology. It also would establish a climate change office in the White House and give the President one year to develop a comprehensive strategy aimed at stabilizing greenhouse gas concentrations in the atmosphere. Again, a first step, but an important one.

Some of you, I imagine, have been following closely the ongoing debate over multi-pollutant legislation for power plants. This is, in fact, the first real debate in the United States over mandatory carbon caps. You will recall that, as a candidate, President Bush favored including carbon in a new multi-pollutant regime, but that once in office, he changed his mind. Senator Jim Jeffords of Vermont, the new chair of the Senate Environment Committee, has made moving a power plant bill his top priority. I expect that serious negotiations over the shape of that bill could be underway shortly. Whether or not a bill that includes a mandatory cap on carbon can make it to the President's desk remains to be seen. But for the first time, it is being seriously debated.

Finally, another bipartisan duo, Senators John McCain and Joe Lieberman, have declared their intent to draw up legislation establishing an economy-wide cap-and-trade system - that's right, cap-and-trade, economy-wide. The senators intend to consult broadly with industry and other stakeholders before drafting the bill, and it's hard to imagine that any such legislation could move through Congress anytime soon. But the very idea that two such prominent lawmakers would be advocating such a far-reaching strategy was virtually unthinkable just a year ago.

To be certain, there are many in Congress, particularly in the House, who remain adamantly opposed to concrete action against climate change. Perhaps they assume, in the greatest tradition of laissez-faire economics, that a rising sea level lifts all boats. Or maybe they just don't like glaciers. But I do believe there is a growing bipartisan recognition that the United States cannot continue to blithely ignore its responsibilities as the world's largest greenhouse gas polluter. It will take some time, several years perhaps, to translate that belated awareness into an effective, credible domestic strategy. But I' confident that in time we will get there. And along the way, we must do our best to ensure that this domestic effort is as compatible as possible with the international effort. The people in the room, who understand the needs of the market, must work with policymakers here and abroad to help forge linkages between the emerging regimes. Working together, we must create the preconditions for the convergence that will be so critical to achieving our ultimate aim.

Climate in the New Domestic Agenda

Our efforts to address climate change do not, of course, proceed in a vacuum. And now, more than ever, we must be sensitive to other concerns that shape the broader context within which we act. For that context has been radically transformed - first, by the slowing of the economy, but much more so by the horrible, haunting events of September 11. The security of our nation and the strength of our economy are now, and will for some time remain, the overriding concerns here in Washington, and with good reason. As a result, a host of other vital issues - climate change among them - will for now take a lower profile. But it is important that we engage, and engage constructively, on the very urgent issues now dominating our national agenda. For it would be a mistake to let others think that the need to safeguard our nation, and the need to safeguard our economy, are somehow at odds with the need to safeguard our environment. We must show that, to the contrary, the right strategies can both protect and strengthen our nation, and advance the fight against global warming.

Let's look, for instance, at the question of "energy security." We can all agree that continuing to rely so heavily on imported oil is a costly mistake. So what is the solution? No matter what your views on drilling in the Arctic refuge, it is clear that no amount of domestic drilling will significantly reduce our reliance on foreign oil. In fact, to the extent that we keep pushing domestic drilling, we only delay the inescapable realization that we need to explore serious alternatives to the oil economy. And, in turn, we put ourselves at a disadvantage against those nations that are planning already for the inevitable transition.

We need to think beyond oil. Not because it's running out; most projections show ample supplies for another quarter century at least. But if we are serious about energy security - whether or not we're serious about addressing climate change - we need to think a lot more shrewdly right now about our future energy paths. We need to be more prudent with the oil we do use - insisting, for instance, on more fuel-efficient vehicles. And we need to start investing in alternatives to oil so that two decades from now we will have new fuels to run our economy, and the infrastructure to support it, that are not only more secure, but also more climate-friendly.

Similarly, we should not let concern over the weakening economy become an excuse for not addressing climate change. I know some are very pleased that the United States has rejected Kyoto. They see economic advantage in it. But whatever the short-term competitive advantage, it will be far outweighed in the long run by the economic consequences of inaction. Whatever the economic indicators for the latest quarter, over the long haul, increased efficiencies can only strengthen a firm's bottom line, and the health of our economy. There are real economic opportunities that come with taking action on climate change. It would be a mistake not to seize them.

The companies in our Business Environmental Leadership Council are demonstrating that investing in cleaner fuels and technologies is good not only for the climate, but for the bottom line, too. We recently released a report that took a close look at six companies that have adopted voluntary greenhouse gas targets. It looked at the reasons why they took on targets, and what the results have been. The companies said one of the motivations for taking on a target was to improve their competitive positioning in the marketplace. And that, in fact, has been the result. Each of the companies is on track to meeting or exceeding its greenhouse gas goal. Together, they've delivered reductions equal to the annual emissions of three million cars. And all the companies are finding that their efforts are helping to reduce production costs and enhance product sales today.

Another motivation cited by the companies was to gain experience that would help inform future climate change policy. It's vital, I believe, that the lessons of these and other companies showing leadership on climate change be widely shared. Our policymakers need to understand that sensible, cost-effective action against climate change will strengthen, not weaken, the long-term health of our economy.

Earlier, I spoke of the need for convergence within and between climate regimes. But we must nurture as well a convergence of critical concerns that - while seemingly independent, or even antagonistic - are all vital to the security and well-being of our nation, and our planet. We must make clear that efforts to protect our homeland and our economic future need not come at the expense of our climate - nor vice-versa.

The great American inventor Thomas Edison once said, "Hell, there are no rules here. We're trying to accomplish something." But to achieve real progress in the struggle against global climate change, clear, sensible rules are absolutely essential. Not to hamstring governments or corporations, but to eventually get everyone playing the same game. It's like baseball or soccer. The rules don't tell you how to win. They merely put everyone on an equal footing, headed for the same goal.

Like Thomas Edison, we are indeed trying to accomplish something, and it is something very important to the future of our businesses, our nations, and the world. We have made important progress, but there is still a very long way to go. Getting there will require tremendous patience and determination. It will require political will. It will require the power of the marketplace. And, it will require convergence.